Contractor is entitled to recover additional compensation due to a school district’s failure to disclose material information during the bidding process, and it is not necessary for the contractor to prove affirmative fraudulent intent to conceal the information.  This California Supreme Court decision resolves a question that had divided several Courts of Appeal in California.  One of the state appellate courts held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading.  Another appellate court held that if the disclosure would have eliminated or materially qualified the misleading effect of facts disclosed, the contractor need not prove an “affirmative fraudulent intent to conceal.”  A third appellate court suggested that careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor.  And finally, the Court of Appeal from which the instant appeal was taken held that a contractor need show only that the public entity knew material facts concerning the project that would affect the contractor’s bid or performance and failed to disclose those facts to the contractor.

In resolving the question of what information must be disclosed by the public entity, the California Supreme Court, in the case of Los Angeles Unified School District v. Great American Insurance Company, 234 P.3d 490, 49 Cal.4th 739 (2010), held as follows:

“We hold a contractor need not prove an affirmative fraudulent intent to conceal. Rather-with the qualifications stated below-a public entity may be required to provide extra compensation if it knew, but failed to disclose, material facts that would affect the contractor’s bid or performance. Because public entities do not insure contractors against their own negligence, relief for nondisclosure is appropriate only when (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.”

The background on this case is that after default terminating a contract with a contractor for the construction of an elementary school, the Los Angeles Unified School District (District) advertised for proposals for another contractor to correct defects in the original contractor’s work and complete the project.  Copies of the original plans and specifications were provided by the District to the prospective bidders, along with 108 pages titled “current correction list” or sometimes referred to as “punch list” that catalogued work by the previous contractor that the District’s inspectors found to be defective, incomplete or missing. After receiving this information, Hayward Construction Company submitted a proposal to do the work on a time and material basis, with a maximum guaranteed price of $4.5 million.  Great American Insurance Company issued a performance bond for Hayward’s work.

After beginning the work, Hayward informed the District it had significantly underestimated the cost of the remedial work due to nonconformities and deficiencies in the previous contractor’s work that had not been noted on the pre-punch lists and which could not have been detected by simple observation of Hayward when bidding.   This is explained in some detail by the court as follows:

“For example, the pre-punch lists called for repairing and cleaning portions of the exterior stucco, but Hayward reported that upon removing some of the plaster surfacing, it discovered it could make acceptable repairs only by removing and replacing the entire exterior surface plus portions of an underlying material. The pre-punch lists also called for fixing tiles at a few locations, but Hayward reported that after removing selected tiles for repair, it determined the entire installation of tile was unacceptable. In the end, Hayward sought extra compensation in the amount of $2,847,592 for work necessitated by what it characterized as latent defects.”

Hayward alleged the District failed to disclose information that would have put the contractor on notice that some of its assumptions were erroneous about the scope of work required.  It alleged, for example, that the District failed to disclose a consultant’s repot that would have alerted Hayward to the defects in the stucco work, and that the District was aware that Hayward’s intended method for curing stucco discoloration would not be effective.

The District disputed that Hayward was entitled to any payment above the original $4.5 million GMP.  In the litigation that ensued between the District and Hayward and its surety, Great American, the trial court granted judgment for the District on the pleadings, rejecting Hayward’s claims of breach of contract by misrepresentation or nondisclosure because Hayward did not allege facts that would allow a conclusion that the District either actively concealed or intentionally omitted material information.  The Court of Appeal reversed trial court’s grant of summary adjudication and judgment on the pleadings, holding that “Hayward may maintain a cross-action for breach of contract based on nondisclosure of material information if it can establish that the District knew material facts concerning the project that would affect Hayward’s bid or performance and failed to disclose those facts to Hayward.”

In the decision on the District’s appeal to the state supreme court, the court reviewed decisions form appellate courts around the state, and even courts from other states, concerning a contractor’s right to rely upon information provided as well as what duty an owner has to provide information.  The court stated:

“[I]t is also settled that ‘ [a] contractor of public works who, acting reasonably, is misled by incorrect plans and specifications issued by the public authorities as the basis for bids and who, as a result, submits a bid which is lower than he would have otherwise made may recover in a contract action for extra work or expenses necessitated by the conditions being other than as represented.’” [citation omitted].

The court noted several decisions, and quoted the Restatement Second of Contracts, for the proposition that nondisclosure may be actionable.   But the court also noted:

“Thus, existing law holds that public entities have no obligation to investigate the costs of performance independent from the obligation to provide prospective bidders with correct plans and specifications. A public entity is not responsible for erroneous assumptions drawn by a contractor from accurate information provided by the public entity  … or for unsupported assumptions drawn from the public entity’s silence … nor does it have any duty to disclose information that is reasonably available or that the contractor knew or had a realistic opportunity to discover…. Moreover, although Public Contract Code section 1104 prohibits public entities from requiring bidders to assume responsibility for the completeness and accuracy of architectural or engineering plans and specifications, public entities retain the power to contractually disclaim responsibility for assumptions a contractor might draw from the presence or absence of information.”

The court went on to explain that the established law provides public entities substantial protection against careless bidding practices by contractors and forecloses the possibility that a public entity will be held liable when a contractor’s own lack of diligence prevented it from fully appreciating the costs of performance. “This being so,” says the court, “protection against careless bidding practices does not require that we allow contractors damaged by a public entity’s misleading nondisclosure to recover only on a showing the public entity harbored a fraudulent intent.”

The supreme court considered the District’s argument that allowing actions for nondisclosure will lead to burdensome practices and costly litigation by compelling public entities to disclose every scrap of information that might related to a project and encouraging contractors to comb through the entity’s files for material that might be used to support an actionable nondisclosure.  In response to that argument the court states:

“The danger, we think, is overstated. As explained earlier, significant restrictions already exist on the ability of contractors to recover from public entities on theories of tort or quantum meruit. And in actions for breach of contract, contractors can recover neither for extra work that would have been bid had they exercised due diligence nor for work occasioned by unanticipated conditions either unknown to the public entity or which the public entity had no reason to believe the contractor would not itself discover. Nondisclosure is actionable, moreover, only if the information at issue materially affects the cost of performance, reducing the possibility that a public entity soliciting bids on a project might easily overlook it. Given these limitations on recovery, as between a truly blameless contractor and the nondisclosing public entity that received the benefit of the contractor’s work, requiring the public entity to pay for that benefit is hardly unjust.”

For these reasons, the court explained that it agreed with the judgment of the court of appeal in favor of the contractor but the court stated that the court of appeal’s holding was overbroad for suggesting that recovery may be had for ANY failure to disclose material information.  In affirming the appellate court judgment, the supreme court remanded the matter with instructions for the appellate court to narrow its holding to meet the requirements of this new supreme court holding which is as follows:

“We hold that a contractor on a public works contract may be entitled to relief for a public entity’s nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected  performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information. The circumstances affecting recovery may include, but are not limited to, positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor. The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.”